Money is how we transfer wealth. Money is social credits; it's the ability to have credits and debits of other people's time.
Naval Ravikant
What is money? First and foremost, money is a coordination mechanism. In the capitalist system, money is what determines how resources are allocated. The principle is that those who create more value for society get rewarded with more money. They can then use this money to get other people to provide services or produce goods for them. You and I have to work to earn money. We have to spend the limited time we have on this planet to earn fiat currencies like the US Dollar or the Euro.
But some actors do not get to do anything to get money: Central Banks. They can print money and hand it over to governments to finance their deficits. I have already written extensively about this: It’s called Quantitative Easy (QE), but it’s code for money printing. The government issues debt, the central bank creates money out of thin air, buys the government debt, receives the interest from the government, and pays back its profits to the government. Rinse and repeat. It’s completely circular.
By printing money, cental banks dilute the value of the currency you own. Because money is nothing but a claim on real world assets, printing money doesn’t create wealth, it just creates price increases. And now the world is grappling with the consequences of the money printing that happened during Covid. You didn’t think that governments could pay for all these people not working and that there wouldn’t be any consequences, did you? One person who seems completely flabbergasted by the global inflation problem is the Head of the European Central Bank (ECB), Christine Lagarde. She sees no link between all the euros she printed between 2020 and 2022, and the 10% inflation rate in Europe. Just watch:
But don’t blame her, it seems her own staff is as lost as her. Look at the inflation projections prepared by the ECB since December 2021. Every three months, the ECB experts thought inflation had peaked and that it was going to go back down to 2% very quickly. But the reality was that inflation kept rising steadily month after month. The ECB should consider updating its inflation forecasting model, because it’s clearly not working.
Of course, all this already happened before, and not so long ago. Even in the middle of the Weimar hyperinflation episode in 1920s, the German central bank was in full denial of what was happening.
The similarities with what is unfolding are striking. The German central bank was justifying increasing the quantity of money to fight price increases, while of course the increase in the quantity of money was what was creating prices increases in the first place.
Since most Western leaders have apparently skipped history and economics classes, they are using the same playbook as Germany in 1920s. It worked so well then, so why not do it again now?
Don’t be mistaken, all the measures above are inflationary. All of them. They will make the inflation problem worse, not better. Inflation is characterized as “too much money chasing too few goods,” so the last thing you should do to fight inflation is throw more money at it. Politicians are unable to let the market take care of the problem.
In the energy industry there is a saying: “The cure for high prices is high prices.” What does it mean? It means that when prices increase, producers are incentivized to produce more and consumers are incentivized to consume less, which results in the market finding a new equilibrium. When governments step in and distort markets, they delay the moment this new equilibrium can be found, prolonging the pain for everyone.
Wherever you live, start paying attention to the measures your government is announcing and ask yourself: Is it helping solve the underlying problem or is it actually going to cause more inflation? I guarantee you everything you see these days is the latter. If you encounter a measure that goes in the right direction, please send me a direct message and I would be happy to feature this measure in my next newsletter!
Next Stop: The Fed Pivot
You can’t read any article on the state of financial markets without the US Federal Reserve (the Fed) so-called “pivot” being mentioned. The pivot refers to the moment the Fed will cave and will stop raising interest rates. So far, the Fed has stayed the course despite the damage being done overseas by a rising US Dollar and mounting evidence that the US economy is slowing down. But with a very large budget deficit and trillions of dollars of debt that has to be rolled over every year, it’s only a matter of time before it becomes unmanageable for the US Government to pay for the interest on all this debt.
The chart below shows how much the US is paying on interest on its debt every year. It went from about $350 billion a year in 2010 up to more than $750 billion today.
At some point, the Fed will have no choice but to resume QE and to print money to help the US Government finance its deficit.
The video below wouldn’t be as funny if everything that was said wasn’t so true. Enjoy!
Fact-Checked
Earlier this week, the Biden administration tried to take credit for the largest (nominal) increase is social security benefits in ten years. Unfortunately for the White House, it got fact-checked almost instantly by Twitter. The White House had nothing to do with the increase in benefits, it was simply a consequence of the application of the indexation formula that had been in place since 1972.
The reason why the increase was so large was because this administration has been unable to keep inflation under control. Really not something it should brag about. After blatantly trying to take Americans for idiots, the White House deleted its tweet. This is how fact checking and media should do their job.
Someone who also thinks we are all idiots is House Speaker Nancy Pelosi. We have it all wrong according to her. The issue is not inflation, the issue is cost of living… It’s good to have someone down to earth like her (despite her $100+ million net worth) telling us we are idiots for talking about inflation.
How Big Tech Misled Its Investors
When a company generates cash and wants to give it back to its shareholders, there are two ways to do it: Pay a dividend, or buy back shares. The latter is often the preferred option as it is more tax efficient for shareholders who have to pay taxes on dividends they receive. The way a share buyback works is the following: The company uses its own cash to buy its own shares in the market before canceling them. Because it reduces the number of shares outstanding, it increases the value of each remaining share (assuming the value of the company stays the same).
Big tech, however, used share buybacks not to reward its shareholders, but to pay its employees. Because a large chunk of the compensation package of Big Tech employees comes in the form of shares, these firms either have to issue new shares or buy them in the open market to give them to their employees. Meta (Facebook’s parent company) and Google pushed this to the extreme and used most or all the amount spent on share buybacks to pay their own employees. Instead of the money going back to shareholders, it went to their employees.
This disregard for shareholders’ interest and a misguided metaverse strategy has led to a 75% collapse in the stock price of Meta over the past 12 months.
Crypto Corner
Despite high volatility in financial markets, one asset has been surprisingly steady over the past five months: Bitcoin. It has been stuck at around $20,000 during this period. Watch Mohamed El-Erian talk about what it means for Bitcoin and crypto in general.
Unphased by the sharp drop in its price this year, the Bitcoin network has already settled $14 trillion of payments this year, surpassing last year’s $13.1 trillion. Adoption is not slowing down. To give you some perspective, this is more than the volume of payments processed by Visa in 2021 ($10.4 trillion)
With the US midterm elections around the corner on November 8, crypto has been a hot topic, with many politicians positioning themselves as pro crypto.
Finally, while Bitcoin may be perceived as a speculative investment in developed countries, it is a lifeline for many in developing countries. It is money that cannot be printed, that cannot be seized by governments, and that cannot be frozen by your bank. While investors in developed countries value the digital scarcity of Bitcoin, it’s the censorship resistance and its self-custody property that make Bitcoin appealing in developing countries. Read this great article by CNBC about how Bitcoin is used in Lebanon.
All it takes to hold your Bitcoin is an app on your phone. No need to register with anyone or to trust any third party. If you want to experiment with a Bitcoin wallet app, try Muun Wallet. It is ridiculously easy to use.
Best Podcast Episodes of the Week
I listen to many podcasts every week. You will find below the links to a selection of the episodes I found most interesting this week.
The Macro Trading Floor Debt, Demographics & Deflation Ahead | Raoul Pal
We Study Billionaires - The Investor’s Podcast Network | Macro and the Energy Market w/ Lyn Alden
Macro Voices | Eric Peters: On The Road From Mean Reversion To Reflexivity
Bankless | SBF vs. Erik Voorhees: How Do We Regulate Crypto?